For a long time, Indian retail investors looking for a steady income have not had access to the safest and most reliable option on the market – government security.
Yes, most of the money you invest in insurance products, pension funds, and provident funds, and some of the money you invest in bank deposits and mutual funds is channeled to government debt securities (g-secs).
But this indirect ownership forces you to incur costs charged by these vehicles that eat away at your returns. Now, with the government allowing direct retail ownership, you can bypass these middlemen. Here’s a deep dive into RBI’s new Retail Direct platform for purchasing g-sec.
What it offers
This platform allows individuals to open and maintain a Retail Direct Gilt (RDG) account directly with the RBI.
To open your account you need a PAN card, savings account and an officially valid KYC document. NRIs eligible to invest in g-secs under FEMA can also open this account.
The onboarding process, which can be done entirely online, is not as straightforward as that of some new-age fintech platforms. But it can be completed in a day or two if your KYC details are properly captured in the central repository.
G-sec can be purchased either upon initial issuance or after having started trading on the secondary market.
RBI’s Retail Direct platform first gives you access to primary auctions. To access secondary market transactions that occur on Negotiated Dealing System – Order Matching (NDS-OM), you must apply separately on Retail Direct to obtain a user ID and password.
RBI Retail Direct is not the only platform that allows you to participate in g-sec auctions. GoBID and NSE broker-owned platforms such as Zerodha Coin also provide such access and may be easier to integrate.
But the RBI platform stands out from the rest in terms of cost, as it does not charge any fees for account opening, maintenance, or transactions.
The RBI conducts periodic g-sec auctions on a schedule (called a borrowing schedule) that it publishes every six months for g-sec and quarterly for Treasury bills. With this new platform, retail investors can invest a minimum of 10,000 up to 2 crore in these auctions.
How auctions work
When you log into Retail Direct, you will find a dashboard listing the titles currently up for auction. They can be of four types – dated government stocks (central government loans for 1 year to 40 years), treasury bills or treasury bills (central government loans for 91, 182 and 364 days), development loans from the ‘State (state government loans for 1 to 30 years) and sovereign gold bonds.
There you will find details such as the type of security, its expiration date, the total auction amount, the amount reserved for retail auction (known as the “non-competitive” auction amount) and the reserve price and the yield.
RBI sets a maximum coupon rate or minimum price for each security in each auction and institutions bid on that basis.
The lowest coupon or highest price at which an auction is fully subscribed becomes the yield or cut-off price. As a retail investor, you don’t need to know how to bid and you can just choose at the final cut-off price or the yield that will be discovered by the institutions. The money is withdrawn in advance from your bank account based on the reserve price set by the RBI.
If the auction finds a lower price, the excess is refunded. To find out the cutoff price or returns, you can follow the auction results posted on the RBI website.
Once you get an allowance in the auction, all you need to do is hold your bond until it matures, when the RBI will automatically redeem it.
Treasury bills are issued below their face value and redeemed at face value, the difference being your interest. The other g-sec pay semi-annual interest to the cut-off yield.
While g-secs are re-listed on the NDS-OM platform, where you can sell or buy them in theory, the majority of them (with the exception of recent 10-year-old g-secs) are low. traded and you may not be able to sell when you choose. So when buying g-sec, match their maturity with your financial goal and don’t budget for cash before maturity.
How to use them
With fixed income options like bank deposits, postal programs, MNTs, and debt mutual funds already on the menu, where could g-sec fit into your portfolio?
Well, g-secs might be suitable for investors who prioritize safety and assured returns over attributes like liquidity and taxation. Small savings programs can achieve better results than direct g-secs in terms of yields because the government tends to offer them special rates despite receiving similar sovereign support.
Mutual funds invest in corporate bonds and are certainly not as safe as g-dry. But they score more g-sec on liquidity (you can sell your units at any time to the fund) and offer more user-friendly t.axation.
If held for more than 3 years, debt fund growth options allow you to earn interest and pay 20% long term capital gains after indexation advantages. Interest of g-secs is taxed each year at your slab rate.